What constitutes edge / why is my system working?

I think your 35% drawdown is the key. It's one thing on a backtest where you see the P&L curve come back up a few weeks/months later. It's one thing on a 10k gambling money account. Now imagine you have all your life savings there. Can you wear 35% and not stop your system / change its parameters? My guess is most of us will panic and get out at the low point.

So my advice would be - think about how much you are comfortable losing, divide that number by 2 and solve for your system max historical drawdown before trading - because trust me, your actual max drawdown will be closer to 2x the historical one!

On a brighter note - these drawdowns are the reason no institutional money can follow these strategies, and why they're viable for retail investors / not arbitraged away. Good luck!
 
alex314159 said:
I think your 35% drawdown is the key. It's one thing on a backtest where you see the P&L curve come back up a few weeks/months later. It's one thing on a 10k gambling money account. Now imagine you have all your life savings there. Can you wear 35% and not stop your system / change its parameters? My guess is most of us will panic and get out at the low point.

So my advice would be - think about how much you are comfortable losing, divide that number by 2 and solve for your system max historical drawdown before trading - because trust me, your actual max drawdown will be closer to 2x the historical one!

On a brighter note - these drawdowns are the reason no institutional money can follow these strategies, and why they're viable for retail investors / not arbitraged away. Good luck!
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Great advice. At this point, I'm starting small. Very small. $100 on my live trading account, primarily to make sure that the trade structure/entries/exits/winrates and other metrics stack up close to the backtest. I don't expect them to match 100%, but I'm looking for atleast a 95% confirmation which would give me the confidence to add to the account. Above that, good point on the emotional side of that loss - losing 35% of x is different for different people, and I'll need to figure out where I put that x.

Here's to a brilliant 2018 of learning, and maybe profit!
 
radiusvector said:
Yes, so in the short term it seems that SPY can beat this system, especially given recent year's gains. But the 10yr SPY Sharpe is 0.38 and mine is around 1 which seems to suggest it might be profitable in the long term. The 2 yr rolling Sharpe for my BT varies between 0.9 and 1.7. There is one particularly nasty drawdown of 35% in the 10 year backtest. But hey, no risk no reward? Attached equity curve over 10 years.
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Very impressive returns. The 10 yr SPY had a worst drawdown than yours. You may have discovered an excellent system.

Good luck.
 
SimpleMeLike said:
Hello qxr1011,

Can you please elaborate why you say F Ernest Chan? Is he not well respected teacher in the automated trading arena?

Thanks
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automation has nothing to do with the trader's edge (the question of the OP's thread): and the problem i have with automation and with chen that its assumed that the edge was already found and what s left is just how to automate the method... wrong assumption ...at least for 99.999% of the wannabe traders the edge was never found, hence nothing to automate !
 
qxr1011 said:
automation has nothing to do with the trader's edge (the question of the OP's thread): and the problem i have with automation and with chen that its assumed that the edge was already found and what s left is just how to automate the method... wrong assumption ...at least for 99.999% of the wannabe traders the edge was never found, hence nothing to automate !
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Hello qxr1011,

Few questions :

1. How does a trader find an edge in trading to make money in your opinion?

Thanks
 
SimpleMeLike said:
Hello qxr1011,

Few questions :

1. How does a trader find an edge in trading to make money in your opinion?

Thanks
More...

since the time of the stone age it was done by observation, trials and the reflection upon the results of those trials

but the prehistoric men had the advantage comparing to the traders: they transferred the knowledge down to next generations, and the accumulated generational knowledge eventually led to the edge, discovered by some smart guy

most of the people in trading arena just did not have enough time to get to the edge,and knowledge and experience mostly not transferred here unlike other areas of human enterprise
 
digitalnomad said:
On a serious note though, when you say works always, I’m hoping you don’t mean “in the black” everyday.
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why not?

black every year is ok, but black every day is from the fantasy world ? :)

in reality it depends on number of trades within the time period in question (year , month, day), robustness of the method, and the distributions of the wins and losses

if we talking about day traders loosing day is possible, loosing week should be rare, loosing month - extremely rare, loosing year - one probably lost his mind :)

digitalnomad said:
What is your definition of always?
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always for the trader is something that is longer than his life... :)
 
Jack1960 said:
Beware these days simple systems simply do do not produce profits over a large number of trades.
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Interesting comment.

In your opinion, what would be an example of the "upper end" of "simple systems " that would be unproductive in volume these days?

What do you see as the prime reasons for this?

Best regards,
T
 
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